Growth reading slashed in cautionary note on economy

By Lucia Mutikani WASHINGTON, June 26 (Reuters) - The U.S. government slashedits estimate for first-quarter economic growth on Wednesday,offering a cautionary note on the recovery as the FederalReserve ponders curtailing its massive monetary stimulus. Gross domestic product expanded at a 1.8 percent annual ratein the quarter, the Commerce Department said. The economy waspreviously reported to have grown at a 2.4 percent pace after again of just 0.4 percent in the final three months of last year. Almost all categories were revised lower, with the exceptionof home construction and government. Economists polled byReuters had expected GDP growth would be unrevised. The biggest surprise was consumer spending, which grew at a2.6 percent pace, not the 3.4 percent rate previously estimated.The revision to consumer spending, which accounts for more thantwo-thirds of U.S. economic activity, sliced more than a halfpercentage point off the GDP growth rate. Economists cautioned against reading too much into the datagiven its backward-looking nature, but said it could weigh onthe Fed as it considers scaling back its bond buying. "At the margin, it tilts them a little bit less stronglytowards the tapering they were talking about a week ago," saidSam Coffin, an economist at UBS in New York. Fed Chairman Ben Bernanke said last week that the centralbank could trim the $85 billion in bonds it is buying each monthsometime later this year and likely bring the program to a closeby mid-2014. Those comments led to a sharp selloff in stock markets anddrove the yield on the benchmark 10-year Treasury note to anearly two-year high. However, a range of strong U.S. economic data on Tuesday -from business spending plans to home prices - bolstered investorsentiment. After closing higher on Tuesday, stocks resumed their ascenton Wednesday. Bonds were also up on the day, with yieldsfalling. The GDP report showed that homebuilding grew at a 14.0percent rate in the first quarter, but a big jump in mortgagerates on the back of Bernanke's remarks threatens to cool thesector. Interest rates on fixed 30-year mortgages jumped more than aquarter point last week to an average 4.46 percent, the MortgageBankers Association said. That killed off refinance activity,although demand for loans to purchase a home edged higher.

PLUSES AND MINUSES The revision to consumer spending largely reflected weakoutlays that non-profits made on medical care services on behalfof consumers, which economists tied to lower government spendingon health care. Even given the revision, consumer spending picked up fromthe fourth quarter despite a rise in taxes, and recent gains inconsumer sentiment suggest households are not pulling back. Growth in the first quarter was also weighed down by weakexports, which contracted at a 1.1 percent pace in the firstquarter in a likely reflection of a global economic slowdown.They had previously been reported to have expanded. Business spending barely grew, with investment onnonresidential structures declining more sharply than previouslyreported. The drop in spending on nonresidential structures wasthe first in two years. The pace of inventory accumulation was revised marginallylower, but it still contributed more than half a percentagepoint to GDP growth given that it was up sharply from the fourthquarter. Excluding inventories, GDP grew at a 1.2 percent rate, theslowest in two years.